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Friday, July 13, 2012

Meanwhile in Scranton, Pa a Test is Coming Between the Courts, the Law and the Lack of Money

Can the Legal System Manufacture Cash for a City That Has
None

In what may be
regarded as the most self destructive move taken by a municipal government
this year,
the city of Scranton, Pennsylvania earlier this year decided to back away
from guarantees on certain bonds the city had issued.

The troubles of
Scranton, a city of 76,000, are a combination of long-term structural decline,
a mayor and City Council at loggerheads and, since June, an inability to
borrow. A majority on the Council turned Scranton
into a financial pariah this spring by refusing to honor a
guarantee that the city had placed on the revenue bonds issued by its
parking authority.

The municipal bond market
took its refusal as a sign that the city might also default on its own bonds,
and cut off credit.

What happened next is that the city experienced the
same thing that a business experiences when the supply of credit is cut
off. It ran out of money.

Gary
Lewis, a financial consultant living in Scranton who follows the developments
closely, said that last Thursday, July 5, the city had only $5,000 on hand. By
Monday, he said, the total was up to $133,000 — but still nowhere near enough
to pay its unpaid bills.

So the mayor did what everybody else does when they
run out of money, they stop making payments.
In this case the city cut the wages of most of its employees to the
minimum wage level. As might be expected
this is highly unsatisfactory to police and fire personnel, and almost
certainly violates contracts and agreements.

Unions
representing city workers won a court injunction last week ordering the mayor
not to cut their pay. But the city issued the smaller checks anyway last
Friday, and the union went back to court on Tuesday, asking a judge to hold the
mayor and the city in contempt of court. It also challenged the city for not
paying overtime and for cutting disability payments.

“They
are running out of laws to violate,” said the lawyer representing the unions,
Thomas W. Jennings, who said the workers were caught in the middle of the
battle between the mayor and the City Council. “We are literally caught in the
cross hairs between the Hatfields and the McCoys.”

So in the next several weeks the drama will play
out. Courts may well order the city to
pay, the city may well not have the money to pay, and yes, this is a preview of
things to come elsewhere.